Interest rates below inflation… annuity rates at historic lows… sliding property values… now is not necessarily a good time to retire. But is it all bad news? Tony Watts looks at what those in or entering retirement need to do to get the most from the years ahead.
Read the front-page news in the nationals you could well end up getting very depressed. ‘Millions to lose up to 75 per cent of retirement income after pension changes’, screamed one recent Telegraph headline.
That followed a new report from the Civitas social policy think tank that described the impact of the ‘collapse of “defined benefit” schemes, including gold-plated final-salary pensions’.
And this was the section of the population that thought it was secure.
Add to this historically low annuity rates, a roller coaster stock market, falling returns on gilts, property values that are continuing to drop away… and you could well wonder if there are any safe places left to put the assets you built up over a lifetime of working and saving.
The fact is that everyone’s retirement scenario differs. And that can make it downright annoying when the public, media or politicians lump them all retirees together – especially when there are blithe claims that pensioners ‘have never had it so good’.
‘Golden generation’ of pensioners
Yes, there are many who are lucky enough not to have to worry. Experts in the field talk about a ‘golden generation’ of pensioners who timed it just right and were there to enjoy the full benefits of a guaranteed final salary pension, who entered the property market when a suburban detached house could be purchased for a few thousand pounds, and whose annuities were negotiated at a time of relatively high interest rates.
These are the retirees you will probably bump into at the golf club, or whiling away the winter in Spain.
Conversely, of course, there are millions of retirees at the other end of the scale – who get by on a meagre State Pension, topped up with means-tested benefits.
But the majority are in between – and trying to work out just how much they can afford to live on in the years ahead. This group is particularly affected by the fact that – despite being increasingly squeezed by rising costs – having assets denies them access to the majority (but not all) of the top-ups and benefits available to those at the bottom of the pile.
For them, the real rate of inflation is well above the RPI experienced by the rest of the population – because the cost of goods and services they spend most of their money on (food, fuel, utilities) have been soaring.
The majority of those with private pensions (those not ravaged by incompetent or rogue providers) have been adversely affected by the Government’s decision to allow providers to peg annual rates at CPI, rather than the faster moving RPI. That (on recent performance) will make a difference of around 0.8% each year – and have a significant cumulative effect over the years to come.
Drawdown plans and annuities
Those taking out annuities now (especially those that do not shop around for the best deals) are finding rates painfully low, while those on private pensions on drawdown plans are seeing rates cut by up to 40% when they come up for review. Low base rates are great news for borrowers… but savings are actually declining in value.
And if all that were not depressing enough, many of those now entering retirement appear to be entering a new and even chillier era.
A recent poll conducted on behalf of Prudential showed that 35 per cent of workers in the UK have no pension at all. According to the latest figures from the ONS, 1.2 million workers have stopped paying into funds because they have lost faith in the system… or have had to make economies.
Final salary pensions are fast becoming a thing of the past, and there is a large slice of the population who have extended their mortage repayment period well into their 60s and even 70s – often to help their children get their feet on the property ladder or to get them through college.
All of which adds up to a very volatile few years ahead, with a large raft of people having a lot of uncertainty to deal with as they plan their retirement. It can especially make a critical difference knowing when to retire.
This makes it absolutely essential for anyone approaching or in retirement to take independent financial advice, even if it means paying fees to get that. It also means shopping around for the very best deals on everything – making access to the Internet essential.
Claiming retirement benefits
And it means getting expert advice on what support is out there: billions of pounds go unclaimed each year by people who assume that having their own home or savings excludes them from all benefits. This is not true and checking with organisations such as www.incomemax.org.uk could make a big difference to your retirement.
But the single most important move you can make is to get a complete handle on all your assets, outgoings and income – current, future and potential. When you find out the worst you can plan accordingly… and you might just find that things aren’t quite as bad as you feared!
One way to get to grips with your financial situation is through the new online software programme ‘RetireEasy’. It allows you to feed in all your data and check out any permutation of scenario (including different rates of return, inflation, stock market performance etc). This allows retirees to live life to the full and make positive lifestyle choices as it clearly states how much capital they have to live on in retirement.